Acceleration clauses: an overview

Contents:

Introduction

Acceleration clauses are terms in loan agreements that require the borrower to pay off the loan immediately if certain conditions are met. For example, most home mortgages have an acceleration clause that is triggered if the borrower misses too many payments. Acceleration clauses most often appear in mortgages, both residential and commercial. They also appear in some leases.

Interest and payment

When a lender invokes an acceleration clause, the borrower must immediately pay the unpaid balance of the loan’s principal, as well as any interest that accumulated before the lender invoked the acceleration clause. The borrower does not, however, have to pay the full amount of interest that would have come due had the loan been paid off normally. For example, most loans allow the borrower to accelerate the loan and pay off the loan early in a single lump sum to avoid paying interest for the remainder of the loan’s term.

Invoking acceleration clauses

Few acceleration clauses trigger automatically. Instead, after the conditions in the clause occur, the lender may choose whether or not to invoke the clause. Where a lender gains the right to invoke an acceleration clause due to a borrower’s default, the lender may lose that right if the borrower corrects his or her default before the lender actually invokes the clause. In cases involving defaults for failing to make timely payments, tender is usually just as effective as actual payment at preventing the lender from invoking an acceleration clause.

Transfer and sale

Some mortgages have clauses that allow acceleration if the borrower sells or transfers the mortgagedproperty. These clauses are intended to protect the lender’s security interest in the mortgagedproperty. Accordingly, some of these “due-on-sale” and “due-on-transfer” clauses only allow acceleration if the sale or transfer would impair the lender’s security interest, or if the borrower fails to get the lender’s consent in advance. These types of clauses may not be triggered if property ownership transfers because the borrower died and the property passed to his heirs. Due-on-sale and due-on-transfer clauses are regulated by the federal Garn-St. Germain Depository Institutions Act of 1982. 12 U.S.C. § 1701j-3(b)(1). The act only affects mortgages of real property.

Waiver

Home mortgages

Home mortgages’ acceleration clauses are designed to trigger in situations where the mortgagee might want to foreclose on the mortgage. This allows the mortgagee to attempt to recover the entire unpaid value of the mortgage, not just the value of a few missed payments.

In some jurisdictions, borrowers in this situation may undo mortgagees’ invocation of acceleration clauses and avoid foreclosure by making-up past-due payments and compensating the mortgagee for some or all of the costs associated with the borrower’s default. In most of these jurisdictions, the key idea is that the borrower must put the mortgagor in the position it would have been in but for the borrower’s default.

Home mortgages often include acceleration clauses that are triggered by failure to make regular payments, attempts to sell or transfer the land, failure to pay property taxes, failure to maintain proper insurance on the property, and failure to make payments on a separate mortgage on the same property.